A time capsule of the greatest financial mania in the history of mankind, told in real-time by regular folks and patriots. May future generations better understand the madness of crowds, and how power and money corrupt.

September 25, 2006

It's a bit strange, to go from a voice in the wilderness, mocked, laughed at, discredited, to being spot-on and going mainstream.Housing Panic is here folks. You, the loyal HP'ers, are vindicated. Victory is ours, and it is sweet, yet it is so painful, so, so painful...Get ready HP'ers. The time is neigh. The hour of the Great Reckoning is here.

How the Fed failed to prevent the housing bubble

There is total detachment from the bad news now pouring out of the US economy. For several years, the booming housing market has made the difference between recession and recovery for the US economy. Zooming house valuations provided private households with the collateral that allowed them to replace the missing income growth with a borrowing binge.

But as the housing market is sagging, this major source of higher consumer spending is plainly drying up, and most obviously and importantly, income growth is by no means catching up.In 2005, real disposable incomes of private households in the United States increased $93.8 billion, or 1.2%, while their debts grew $1,208.6 billion, or 11.7%. Total consumer spending on goods, services and new housing accounted for 92% of real GDP growth.

Most economic data have softened, with the downtrend accelerating. In the face of this fact, it could not be doubted that Mr Ben Bernanke and most others in the Federal Reserve were anxious to stop their rate hikes. In question was only whether they would dare to do so in view of the high and rising inflation rates. They dared.

They even disappointed those who had predicted the combination of a declared “pause” with hawkish remarks about fighting inflation.

Present American folklore has it that a protracted slump in house prices is impossible. Let us say for many people it is unthinkable. And that is precisely one reason why this housing bubble could go to such unprecedented excess. The little historical knowledge we have about bursting housing bubbles is from a study published by the International Monetary Fund in its World Economic Outlook of April 2003. It presents past experience in a very different light. Here are some excerpts on decisive points:

“To qualify as a bust, a housing price contraction had to exceed 14%, compared with 37% for equities. Housing price busts were slightly less frequent than equity price crashes...Most housing price busts clustered around 1980-82 and 1989-92, while equity price busts were more evenly distributed across time...

"Housing price crashes differ from equity price busts also in other three important dimensions. First, the price corrections during house price busts averaged 30%, reflecting the lower volatility of housing prices and the lower liquidity in housing markets. Second, housing price crashes lasted about four years, about 11/2 years longer than equity price busts. Third, the association between booms and busts was stronger for housing than for equity prices.”

20 comments:

To understand who he was, you have to go back to another time when the world was powered by the black fuel, RE flippers made big bucks on pre-construction deals, and the deserts sprouted great cities of pipe and steel. Gone now swept away. For reasons long forgotten, two mighty warrior tribes went to war and touched off a blaze which engulfed them all.

Without fuel they were nothing. They built a house of straw. The thundering machines sputtered and stopped. Their leaders talked and talked and talked. But nothing could stem the avalanche. Their world crumbled. The cities exploded. A whirlwind of looting, a firestorm of fear. Men began to feed on men.

On the roads it was a white line nightmare. Only those mobile enough to scavenge, brutal enough to pillage would survive. The gangs took over the highways, ready to wage war for a tank of juice. And in this maelstrom of decay, ordinary men were battered and smashed.

Except for one man armed with an AK-47, and a Honda full of silver. In the roar of an engine, he lost everything and became a shell of a man, a burnt out, desolate man, a man haunted by the demons of his past. A man who wandered out into the wasteland. And it was here in this blighted place that he learned to live again.

Any thoughts on what will happen when the fed cuts rates? There ares ome predicting this will happen but I wonder. I'm not sure they can cut rates much due to the massive debts and weak dollar. It would be boggling to see this all go to another level of indebtness.

I'm not saying the fed will definitely not cut rates, but we're at the top end of their inflation rate target now, are we not? They'll definitely be tempted to cut rates when the housing bubble further infects the rest of the economy but the fed has 2 main priorites: 1) inflation; 2) economic growth. In that order. That would be a serious lapse in judgement if they lower the interest rate target while core inflation is still approaching 3%.

now i oknow why ou economy is so f'ckd up. think about it, they cut the rates back in 2001 in the hope of stimulating the economy and avoiding the recession. however the recent run up in housing prices is caused by irresponsible borrowing and now, the fed will try to fix it by, probably, cutting the rates again. two wrongs don't make it right. i would rather see a recession and correct the mistakes that were made. tighten lending practices. no more exotic (bs) loans. definitely no more 24 yr. olds.

It is the Fed.'s fault. The changed the under writing criterion for people to qualify. Greenspan and the team made it so that all you had to do to qualify was to be able to make the first years payments. That is why we have the teaser low rates. They knew what they were doing!

No government institutions here. Fan & Fred, partially (mortgage bankers), but they are required by law to only have the best credit loans. The wholly private banks are the ones pushing the toxic waste.

Those who went along with the bubble profited greatly but were free riders:

The Fed has already said homedebtors are screwed and they won't be there to rescue them. Let's see if they hold true on this. I posted this just the other day on HP:

From March 2006:

The Federal Reserve has no intention of preserving all of the recent gains in home price values, said Federal Reserve board governor Donald Kohn on Thursday.

In his remarks, Kohn attacked the popular 'Greenspan put' theory that Fed policy would always protect investors from sharp asset market drops while doing nothing to restrain these markets when prices rise.

"This argument strikes me as a misreading of history," Kohn said.

"Conventional policy as practiced by the Federal Reserve has not insulated investors from downside risk," he said.

"Whatever might have once been thought about the existence of a 'Greenspan put,' stock market, investors could not have endured the experience of the last five years in the United States and concluded that they were hedged on the downside by asymmetric monetary policy," Kohn said.

"The same consideration apply to homeowners: All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions," Kohn said